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Repurchase Agreements and the European Sovereign Debt Crises: The Role of European Clearinghouses

In: HANDBOOK OF GLOBAL FINANCIAL MARKETS Transformations, Dependence, and Risk Spillovers

Author

Listed:
  • Angela Armakolla
  • Raphael Douady
  • Jean-Paul Laurent

Abstract

This chapter investigates the European repo market and its role as an amplifier of tensions in the sovereign debt markets. We focus on the centrally cleared segment, representing the majority of European repos. A novel data set on repo and margin haircuts applied to sovereign bonds by central clearing counterparties (CCPs) is gathered, allowing us to assess the haircut methodologies used by the major European CCPs. We document that following increases in sovereign risk, haircuts set by major CCPs on peripheral sovereign bonds increased significantly. The procyclicality of haircuts and the concentration of bilateral repos raise concerns about the CCP-intermediated repo market as a source of systemic risk in the euro area. This is however mitigated by the countercyclical monetary policy of the European Central Bank (ECB).

Suggested Citation

  • Angela Armakolla & Raphael Douady & Jean-Paul Laurent, 2019. "Repurchase Agreements and the European Sovereign Debt Crises: The Role of European Clearinghouses," World Scientific Book Chapters, in: Sabri Boubaker & Duc Khuong Nguyen (ed.), HANDBOOK OF GLOBAL FINANCIAL MARKETS Transformations, Dependence, and Risk Spillovers, chapter 18, pages 467-492, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813236653_0018
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    Keywords

    Market Integration; Risk Management; Risk Assessment; Financial Uncertainty; Volatility; Financial Markets; Financial Development; Country Risks; Sovereign Debt Markets;
    All these keywords.

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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